Taking its cue from New York, California introduced legislation to require online retailers with no physical presence to collect sales tax for sales into the state. The California bill, Assembly Bill 178, resembles a similar New York statute that, thus far, has passed constitutional muster at least with the local judiciary.
States have been seeking to get their claws into Amazon and similar retailers for a decade. States argue that the increased prevalence of Internet merchants and their cannibalization of sales by brick-and-mortar local merchants has reduced sales tax revenues.
In 1992’s Quill decision, the U.S. Supreme Court stated that merchants can only be forced to collect a state’s sales tax if the company has a “physical presence” in the state. This immunity is perceived as an advantage for Internet-based companies, whose bricks-and-mortar, local competitors are required to collect sales tax.
The proposing California Assemblywoman stated the bill would generate an additional $55 million in sales tax revenues a year, while New York estimates it will see a $50 million dollar increase. Like the New York bill, an exception applies for Internet retailers with revenues less than $10,000.
Amazon operates largely upon sales commissions received through its network of affiliate retailers based around the country. It’s through these affiliates that states argue nexus via physical presence exists.
Considering the success to date of the New York statute and Amazon’s seemingly perceived culpability for single-handedly destroying state budgets, Amazon can expect similar legislation to be introduced across the county with vigor.